Sunday
November 23, 2014

Xi in Argentina

Sunday, July 20, 2014

In focus: the currency swap deal with China

The Argentine Central Bank signed an agreement with its counterpart in Beijing.
Accord worth US$11 billion between Central Banks makes waves among economists

Of the keynote agreements signed during Friday’s meeting between President Cristina Fernández de Kirchner and Chinese President Xi Jinping — which included major investments in hydroelectric dams, freight railways, and a currency swap between the countries’ respective Central Banks worth US$ 11 billion — it was the swap that received the most scrutiny from economists studying the deals.

“The exchange will mainly serve to facilitate investments in the currency of the country providing the funds and to strengthen the level of international reserves,” the Central Bank said in a statement released when the deal was signed. Yesterday, Foreign Minister Héctor Timerman declared that the the deal “is a very important initiative that demonstrates the level of understanding and confidence that exists at a time of an unresolved international economic crisis.”

According to the terms of the deal, similar to a previous accord signed in 2009 but which was never used and expired in 2012, the Central Bank could ask for the total or partial disbursement of 70 billion yuan in exchange for pesos to invest it, or to exchange it to dollars to fuel its reserves, said an Argentine Central Bank official, who spoke on condition of anonymity. The new deal will also run for three years.

Should the Argentine Central Bank request any yuan from its counterpart in Beijing, the terms of the deal allow the country to send pesos in exchange and the loan would be payable in 12 months with an interest rate of between six to seven percent.

Any transferred yuan could be used to boost the Central Bank’s reserves, provided that they are exchanged into US dollars. Reserves in 2013 fell a precipitous US$ 12.69 billion, but thus far in 2014 reserves have fallen a much more moderate US$ 930 million following a devaluation of the peso in January.

A matter of debate

However, economists known to consult for and with opposition political parties yesterday seized on this condition, arguing that yuan is not a widely traded global currency and thus not a reliable form to expand US dollar reserves. As such, the deals would be useful to facilitate trade between Buenos Aires and Beijing.

Former Central Bank president Aldo Pignanelli, said that with these deals “dollars are not going to arrive in Argentina... what is going to arrive is products that we will have to pay for.” Argentina ran a trade deficit last year of US$5.8 billion with China.

“I wouldn’t be so optimistic as they say in the Central Bank that the money could be used as a reserve.” Pignanelli is an economic consultant with Sergio Massa’s opposition Renewal Front.

“I would divide the deals into the categories of trade, infrastructure and financial agreements. The financial agreement is a fantasy,” said Carlos Melconián, economist with the centre-right PRO party.

That vision however was not at all uniform. “Any kind of swap is helpful in the face of speculative attacks, it’s a financial instrument for the Central Bank in the face of uncertainty. It’s not a silver bullet but it is good news and it cannot hurt in any way,” economist Agustín D’Attellis told the Herald in reference to the swap deal yesterday.

“The yuan is not as freely exchanged globally as the dollar or the euro, but is it helpful nonetheless in the face of the pending negotiations with the vultures and the tension that it could generate,” said D’Attellis.

Despite the criticisms, the yuan today can be freely converted into US dollars, euros or other currencies in Hong Kong, London or Singapore.

In October of 2013, the European Central Bank (ECB) — a key actor in the European financial system and an engineer of its still nascent recovery — agreed with the People’s Bank of China a currency swap worth 45 billion euros. For the ECB, “the swap arrangement is intended to serve as a backstop liquidity facility and to reassure euro area banks of the continuous provision of Chinese yuan.”

As such, various Central Banks have decided to convert parts of their reserves into yuan, including Indonesia,the United Kingdom, Brazil, Singapore, Ukraine, Australia, Turkey, the United Arab Emirates, Hong Kong, South Korea and New Zeland, among others.

The People’s Republic of China has also made it a central part of its foreign policy to promote the yuan as an international means of exchange to replace the US dollar, and it has surpassed the Swiss Franc as an international means of reserve.

“What I celebrate is the willingess to sit down and negotiate with the whole world, in a negotiation that I hope will be slightly mischievous, as the progressives say,” Melconián added.

Herald staff with Reuters

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